ETF firm raises concerns on U.S. commodity rules

By Mark Noble | August 25, 2009 | Last updated on August 25, 2009
3 min read

It’s widely expected that the U.S. Commodity Trading Futures Commission (CTFC) will impose speculative limits on energy positions. The move could have a drastic impact on commodity exchange-traded funds (ETFs), the CEO of a Canadian-based ETF firm says.

The CTFC wants to stamp out rampant speculation in the energy market. There is a widespread argument that the run-up to a $147 barrel of oil — and the economic fallout that resulted — was largely the result of speculative investment.

CTFC recently held hearings at the end of July and early August regarding Concept Release 74 FR 12282, which would create a new limited risk management exemption for speculative position limits. In effect, certain market participants would be limited in the amount of direct energy commodity exposure they could take.

The hope is that by limiting the size and position of energy commodity trades, market manipulation could be greatly reduced. Some have argued that the correlation between commodity prices and the rise of commodity index funds has not been a coincidence. Investors have piled into the funds to make sector-specific calls on the energy market.

Adam Felesky, CEO of Horizons BetaPro, believes that the speculative limits could unfairly target commodity ETFs, which use options contracts. BetaPro is a major player in the commodity ETF market, managing the second largest natural gas ETF in North America.

Felesky participated in the CTFC hearings and asserted, based on empirical evidence, that the Horizons BetaPro Commodity ETFs asset flows have generally provided contrarian performance to the overall trends in the commodity prices, which would suggest that they have a stabilizing rather than a negative effect on commodity pricing.

“Our ETFs have the opposite effect to what has been suggested in the media,” Felesky tells “ETFs have provided price stability to commodity markets, if anything &#151′ it’s the same for our U.S. competitor. As commodity prices rise, our investors were selling into that rise, or going into our short fund or selling the long position. As commodity prices trend down, our investors are coming in and providing price stability.”

Even still, the contrarian presence of ETFs has not been able to reverse pricing trends. Felesky says this is proof that they do not have the size to manipulate commodity prices.

“Nobody knows the size of the physical market. And when you look at the commodities market, you really need to look at the physical market,” Felesky says. ETF investors sold their crude exposure as oil rose from $75 to $150, mirroring inflows into natural gas as it fell from $6 to $3. “The physical markets must be a lot bigger because our flows are immaterial. The commodity price doesn’t seem to care.”

Felesky says his firm is in favour of speculative limits, but the limits should be imposed on individuals. Our long commodity-based ETFs are the aggregate investment of thousands of individual investors. Felesky told the commission that not one investor has indirectly obtained a position in any of his firm’s commodity-based ETFs in excess of the speculative limit that would otherwise be imposed directly on such an individual.

In addition, the ETF inflows are the result of aggregate decisions. Felesky suspects that if manipulation is happening, it would be the result of larger institutional asset pools.

“That’s the big difference from the endowment; that pool of money is being moved on that portfolio manager’s decision. Not only are we a fraction of the size, [but] our net change is an aggregation of all these individual decisions, which is much different than one large player pulling the trigger on billions of dollars,” Felesky says.

If the speculative limits are placed on ETFs, Felesky says it could result in less transparency and fragmentation in the commodity markets. Although dollar figures have been clarified, Felesky says the natural gas ETFs that his firm offers could be broken up into as many as 26 different ETFs to stay under the imposed speculation limits.

Ultimately, ETFs might have to look for commodity exposure outside the CTFC’s jurisdiction.

“It’s way too early to speculate on what we would do until the limits are announced,” Felesky says. “If the limits were very low, we would look at other markets to get our exposure. There are lots of different tools we can look at to get the energy exposure for our investors.”


Mark Noble